Monday, January 18, 2010

My Objection to GMU Treatment of Growth Rates, Sans Sports Analogy

In a recent post I may have been too clever by half, or even by three-fourths. I thought I had discovered a glaring contradiction in the arguments of some GMU bloggers in their disputes with Keynesians lately. But instead of stating my view plainly, I invented a basketball game between Team GMU and Team JMK (John Maynard Keynes). Let me point out the perceived problem in plain English to make sure my point isn't lost:

* Some GMU professors have been speculating lately about Samuelson's famous textbook predictions that the Soviet Union would eventually overtake the US. Brad DeLong tried to defend Samuelson from the accusation that his mistake was due to left-wing bias. DeLong pointed out that using standard mainstream production functions etc., you would expect the poorer Soviet Union to grow at a higher rate than the U.S. (There was other technical stuff too.)

* Bryan Caplan came back and explained that this was very naive, that the institutional structures made a big difference, etc. Here's Caplan's summary:

Bottom line: Even on Brad's charitable interpretation of Samuelson and company, their argument was unreasonably sympathetic to the Soviets. There was never a point in Soviet history when a sensible economist would have seen communism as good for growth in any meaningful sense.

OK so I think Caplan established that a free market economist would have recognized that not only did the US enjoy a higher living standard, but that there was no reason to suppose that that gap would shrink over time.

* Now in an apparently totally different debate, the GMU bloggers were getting in fights with the Keynesians over the effects of social democratic welfare states on European economic growth rates. It's a long story, but for sure the GMU'ers loved this post blasting Paul Krugman and Matt Yglesias. (Caplan linked favorably to it [I don't have the link right now], and here's Russ Roberts calling it a "spectacular analysis.")

But the irony is that that "spectacular analysis" argues that only an idiot would have thought that European welfare states would grow more slowly than the US. (And so Yglesias shouldn't be high-fiving Krugman over the apparent empirical finding that Europe doesn't grow more slowly.) According to the writer, the important thing is the level of economic output, not the rate of its growth. Why? Because (he claims) standard economic growth theory shows that poorer countries tend to grow faster than rich countries, other things equal. So the real issue with Europe, he claims, isn't whether or not it grows faster than the US, but whether it has a higher or lower per capita income, and whether its growth rate is that much higher than the US's, given how much poorer Europe tends to be.

Now I'm not saying Caplan was wrong about the Soviet Union, and I'm not saying this new guy is wrong about Europe. What I am saying is that these two positions seem contradictory. When the Soviet Union grew more slowly than the US, the GMU'ers said, "Ha! We knew it! Only you commie lovers would have used the Solow model on a capitalist and a socialist country." Yet when Europe grew as fast or faster than the US, the GMU'ers said, "So what? Using the Solow model we would expect the capitalist and the social democratic welfare states to show these characteristics."

Last point: You can argue that the US is a welfare state, not different in kind from Europe. Fair enough. But I don't think any GMU'er made that subtle distinction.

Bob, I don't see the contradiction. The standard theory says that all else equal countries with lower income levels should grow faster than countries with higher levels. But all else wasn't equal; the Soviet Union was a communist country, while the U.S. wasn't. Since free market types believe communism retards growth, they would expect the Soviet Union not to grow as fast as just looking at levels would indicate.

It's the same story with Europe. What the Super-Economy guy is saying is that European countries should grow faster assuming that their more social democratic policies don't retard growth. Since, in fact, European countries haven't been growing faster, this is evidence that their more social democratic policies are retarding growth. Not only are the two positions not contradictory, they are in fact both making the same point, though they are coming at the question from different directions.

I agree it's not a literal contradiction, but I don't think they came out and presented the case the way you have, at Step 1. I think they saw the collapse of the Soviet Union and said, "Ha ha Samuelson you're an idiot," and then saw that Europe grew as fast or faster than the US and said, "Duh, who would have thought otherwise?"

E.g. their position is consistent with the Soviet Union growing faster than the US, or with Europe growing more slowly. And I think they needed to see the actual data before calibrating their "duh, of course this is our view" position.

For example, in light of the Soviet Union and all the literature I've seen on the benefits of economic freedom, I would have guessed Europe grew more slowly. The fact that it hasn't, makes me (a) want to double check the numbers and (b) reconsider whether Europe is that much more socialized than the US.

Wait, in the "Krugman Deceives Yglesias" piece, the author states that the growth rate for the U.S. (1980 - 2008) is slightly larger than the EU15.

Just below the first figure:"Note that the US performance is above the linear prediction and the E.U15 slightly below. This is not in any way scientific, but using the simple linear framework the US, starting above average, "should" have grown by 46%, and the EU.15, starting around average, "should" have growth by 74%. In fact the US grew by 71% and the EU by 66%."

Bob I'm afraid you might've missed the whole point of super-economy. he was NOT claiming what you said he was. Infact the opposite is the case! He claimed that poorer countries are EXPECTED to grow faster to "catch-up" and that as Manzi has shown, the US has "maintained the lead" in growth rates EVEN THOUGH europe is poor. and this is how social democracy has DEPRESSED growth rates. Unless i'm on crack. then i apologize.

If you are right, then the actual debate between GMU guys and Yglesias et al. is even screwier than I originally surmised.

Manzi originally said that US GDP had grown faster than Europe's because of its dynamic economy.

Then a bunch of people went nuts saying that the difference was due to population change, and that if you use per capita GDP, Europe doesn't grow more slowly than the US (or at the very least, the difference is negligible).

Yglesias was so sure that this was the main point, that he got mad when Tyler wouldn't come out and say, "Manzi was wrong." So Tyler came out and said, "Manzi was wrong."

I haven't gotten hip deep into the numbers, but I didn't see anybody saying, "Manzi was right all along, even though his initial statistic was a non sequitur" except possibly me. I.e. nobody except me was actually standing up for Manzi.

I have not checked the data myself. But the GMU guys seemed clearly to be retreating from Manzi's original claim, to a fallback position of, "OK sure Yglesias and Krugman, you're right that Europe has had faster per capita GDP growth than the US. But...hey! Look at this guy over here! He has shown that we should expect this to be the case, you idiots! Don't you know about the Solow model?"